How to Read Candlestick charts?

Candlestick charts were originated in Japan over 100 years before the West had
developed the bar charts and point-and-figure charts. In the 1700s, a Japanese man
known as Homma discovered that as there was a link between price and the supply
and demand of rice, the markets also were strongly influenced by the emotions of
traders.

A daily candlestick charts shows the security’s open, high, low, and close price for
the day. The candlestick’s wide or rectangle part is called the “real body” which
shows the link between opening and closing prices.

This real body shows the price range between the open and close of that day’s
trading.

When the real body is filled, black or red then it means that the close is lower than
the open and is known as the bearish candle. It shows that the prices opened, the
bears pushed the prices down and closed lower than the opening price.

If the real body is empty, white or green then it means that the close was higher than
the open known as the bullish candle. It shows that the prices opened, the bulls
pushed the prices up and closed higher than the opening price.

The thin vertical lines above and below the real body is knowns as the wicks or
shadows which represents the high and low prices of the trading session.

The upper shadow shows the high price and lower shadow shows the low prices
reached during the trading session.
 Before we jump into learning about different candlestick charts, there are few
assumptions which need to be kept in mind that are specific to the candlestick
charts.

1. Strength is represented by a bullish or green candle and weakness by a bearish or red candle.
One should ensure that whenever they are buying it is a green candle day and whenever they are
selling, ensure that it’s a red candle day.

2. The textbook definition of a patterns states certain criteria, but one should state that there could
be minor variations to the pattern depending on certain market conditions.

3. One should look for a prior trend. If you are looking at a bullish reversal pattern, then the prior
trend should be bearish and if you are looking for a bearish reversal pattern then the prior trend
should be bullish.

35 Types of Candlestick Patterns:

The candlestick patterns can be divided into:

 Continuation Patterns

 Bullish Reversal Patterns

 Bearish Reversal Patterns
Below is the list of 35 Types of Candlestick Patterns which is categorised in the above
categories:

Bullish Reversal Candlestick Patterns:

Bullish Reversal candlestick patterns indicate that the ongoing downtrend is going to
reverse to an uptrend.

Thus, the traders should be cautious about their short positions when the bullish
reversal candlestick chart patterns are formed.
Below are the different types of bullish reversal candlestick patterns:

1. Hammer:
Hammer is a single candlestick pattern that is formed at the end of a downtrend and
signals a bullish reversal.
The real body of this candle is small and is located at the top with a lower shadow
which should be more than twice the real body. This candlestick chart pattern has no
or little upper shadow.

The psychology behind this candle formation is that the prices opened, and sellers
pushed down the prices.

Suddenly the buyers came into the market and pushed the prices up and closed the
trading session more than the opening price.

This resulted in the formation of bullish pattern and signifies that buyers are back in
the market and downtrend may end.
Traders can enter a long position if next day a bullish candle is formed and can place
a stop-loss at the low of Hammer.

Below is an example of Hammer candlestick pattern:

2. Piercing Pattern:
Piercing pattern is a multiple candlestick chart pattern formed after a downtrend
indicating a bullish reversal.
Two candles form it, the first candle being a bearish candle which indicates the
continuation of the downtrend.

The second candle is a bullish candle which opens the gap down but closes more
than 50% of the real body of the previous candle, which shows that the bulls are
back in the market and a bullish reversal is going to take place.
Traders can enter a long position if the next day a bullish candle is formed and can
place a stop-loss at the low of the second candle.
Below is an example of a Piercing Candlestick Pattern:

3. Bullish Engulfing:
Bullish Engulfing is a multiple candlestick chart pattern that is formed after a
downtrend indicating a bullish reversal.
It is formed by two candles, the second candlestick engulfing the first candlestick.
The first candle is a bearish candle that indicates the continuation of the downtrend.
The second candlestick is a long bullish candle that completely engulfs the first
candle and shows that the bulls are back in the market.

Traders can enter a long position if next day a bullish candle is formed and can place
a stop-loss at the low of the second candle.

Below is an example of Bullish Engulfing Candlestick Pattern:

4. The Morning Star:

The Morning Star is a multiple candlestick chart pattern which is formed after a
downtrend indicating a bullish reversal.
It is made of 3 candlesticks, the first being a bearish candle, the second a Doji and
the third being a bullish candle.
The first candle shows the continuation of the downtrend. The second candle being a
doji indicates indecision in the market. The third bullish candle shows that the bulls
are back in the market and reversal will take place.

The second candle should be completely out of the real bodies of the first and third
candles.

Traders can enter a long position if the next day a bullish candle is formed and can
place a stop-loss at the low of the second candle.

Below is an example of Morning Star Candlestick Charts Pattern:

5. Three White Soldiers:
The Three White Soldiers is a multiple candlestick pattern that is formed after a
downtrend indicating a bullish reversal.
These candlestick charts are made of three long bullish bodies which do not have
long shadows and are open within the real body of the previous candle in the
pattern.
6. White Marubozu:
The White Marubozu is a single candlestick pattern that is formed after a downtrend
indicating a bullish reversal.
This candlestick has a long bullish body with no upper or lower shadows which
shows that the bulls are exerting buying pressure and the markets may turn bullish.